Indiana Securities Division

Keep an Eye Out for Affinity Fraud

(originally published October 2008)

In these turbulent economic times, most consumers are appropriately more guarded with their investments. They may be doing more research and choosing to pursue opportunities from trusted sources — like people they know.

Unfortunately, the economy has created an environment ripe with opportunity for one of the oldest types of scams — affinity fraud.

Affinity fraud is an investment scam that preys upon members of identifiable groups, such as religious or ethnic communities, the elderly or professional associations. The con artists who promote affinity scams frequently are — or pretend to be — members of the group.

Trust and friendship are often exploited through these investment schemes. Thomas and Marietta Squibb, a well known and respected couple within the Mishawaka/South Bend community, told investors they were developing campgrounds in Michigan and condos in Florida. In reality, no such land existed. One victim who attended church with the couple for 40 years said that everyone trusted the Squibbs. Another noted that Thomas was “a fine Christian man.”

Over the course of 10 years, the Squibbs took approximately $11.5 million from nearly 200 investors, many who were neighbors, friends and members of the same church. Last year, my office worked with the U.S. Attorney for the Northern District of Indiana to secure a sentence of 17.5 years in prison for Thomas and eight years for Marietta.

Affinity scams often operate as Ponzi schemes, such as the one perpetrated by the Squibbs. They were able to pay interest to initial investors with the money received from new investors, creating the appearance of a successful investment. This eased the minds of existing investors and provided an illusion that helped recruit even more unsuspecting investors. In general, by the time the pool of available investors in a Ponzi scheme has been exhausted and the scheme collapses, the con artist and the money invested are long gone.

To avoid falling prey to affinity fraud, never make an investment based solely on reputation or the recommendation of a member of a group to which you belong. Even an investment tip from your best friend should be researched and explored with a trusted financial adviser.

Be skeptical of any investment opportunity that is not in writing. Affinity fraud, especially, relies heavily on word-of-mouth and networking among group members. You should also be suspicious if you are told not to share details of the investment with people outside of the group or to keep the investment opportunity confidential.

Don't be pressured or rushed into buying an investment before you have a chance to think about or investigate the opportunity. Just because someone you know made money, or claims to have made money, doesn't mean you will, too.

Most importantly, use common sense. If you’re presented with an investment opportunity that seems too good to be true, it probably is. Seek advice from a professional, trusted third party and spare yourself — and future potential investors from your church, community or other association — potential heartache and loss when the bad investment goes sour.

Finally, while it can be difficult to turn in a once-trusted group member to law enforcement officials, it is one of the most effective ways to combat affinity fraud. In most cases, the fraudster has likely taken advantage of people beyond just one group or community. Reporting the person will help protect future potential investors. You can call my office’s Securities Division at 1-800-223-8791 to report affinity fraud.